Warning over Rock rescue toll on taxpayer

Facing embarrassment: Government action could break one of Brown's key rules

The nationalisation of Northern Rock could plunge the public finances into disarray and destroy Gordon Brown's reputation on the economy.

Experts today warned that if the stricken Newcastle bank is saved by the Government rather than a private bidder, the £25 billion loan from the Bank of England would end up being left on the Treasury's books.

That could send public-sector net debt rocketing and push it above 40% of gross domestic product - breaking one of Brown's key fiscal rules, the sustainable investment rule, which dictates debt should be kept at "a low and sustainable level".

It would be a major embarrassment for the Prime Minister, whose reputation for economic competence, built up while he was Chancellor, is in danger of collapsing.

Carl Emmerson, deputy director at the Institute for Fiscal Studies, said the nationalisation of Northern Rock would put enormous strain on the public finances.

"Northern Rock may turn out to do well but it may turn out to do badly," he said. "At the moment, that risk is held by private-sector shareholders. It would be held by the taxpayer instead."

The Government was today under growing pressure to reveal how much the rescue of Northern Rock will cost the taxpayer.

As well as underwriting the loan from the Bank of England, the Government has guaranteed savers' deposits of as much as £24 billion.

The Treasury has also hired investment bank Goldman Sachs and law firm Slaughter and May as advisers, with fees likely to be millions. A nationalisation could also force the Government to pay as much as £1.7 billion - 410p a share, equivalent to Northern Rock's book value - to shareholders.

The Treasury today insisted a private rescue of the bank was still its preferred option. If a private sale goes ahead, the successful bidder is likely to pick up the fees charged by the Treasury's advisers and repay the Bank of England loan.

However, there are serious doubts over the proposals put forward by Olivant, the consortium led by former Abbey boss Luqman Arnold, and Sir Richard Branson's Virgin Money.

Even if Arnold or Branson is successful, both have proposed only to pay back about half the Bank loan immediately - leaving the taxpayer liable for the rest for at least two or three years.

It is still unclear how the Treasury plans to treat any money it uses to save Northern Rock in the public accounts.

Conservative MP Michael Fallon, a senior member of the Treasury Select Committee, has written to Sir John Bourn, head of the National Audit Office, to rule on how the liabilities should be treated in the public accounts.

He has also tabled a question to Chancellor Alistair Darling, asking what fees have been paid to date to Goldman Sachs and Slaughter and May. The Treasury declined to comment.